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MONEY BOX
Presenter: PAUL LEWIS
TRANSMISSION: 14th JANUARY 2006 12.00-12.30pm
RADIO 4
LEWIS: Hello. In today’s programme, the Pensions
Regulator flexes his muscles: companies are told they must put
pensions above shareholders. Another major insurer is fined for
blocking mortgage endowment complaints. Thousands of cases will
have to be reviewed. Bob Howard’s with me today.
HOWARD: With new evidence of the problems with tax
credits, this time given to a powerful parliamentary enquiry.
FIELDING: I’m dealing with people who go to a cash point
on a Thursday night to get their money out to buy their food for the
weekend and there isn’t any.
LEWIS: And competition hots up in personal loans. We
check out the best deals and the pitfalls.
But first, a small lingerie manufacturer from Nottingham has become
the first company to be told to put spare money into its pension fund
rather than give it to shareholders. Sherwood Group had £11 million of
cash after selling off some assets, which it wanted to distribute to its
investors, but it also has an £8.6 million hole in its pension fund and
this week the Pensions Regulator stepped in to say it must fill that gap
before giving any money back to shareholders. Sherwood’s Chief
Executive Carol Duncumb thinks companies and shareholders are only
just beginning to realise the new environment they’re in.
DUNCUMB: I believe that corporate UK plc. has a real issue
now. If they have an exposure to a pension deficit, which many plc’s
have, then they have a wider obligation, which is underpinned by the
power of the Regulator’s office. And I don’t think that equity investors,
shareholders understand or realise just how much of an onerous
obligation that actually may be. If we were planning to use our cash
surplus for any kind of major use, whether it be a share buyback or an
acquisition or a merger of some sort, we’d still have to apply to the
Pension Office. We do as a board feel a little bit hamstrung now. On
the other hand, I realise that it’s a debt on the balance sheet which needs
to be addressed.
LEWIS: Carol Duncumb. The Pensions Regulator began
work in April and so far has negotiated a settlement in more than a
hundred cases, but Sherwood is the first where it has forced a company
to put its pension deficit before the interests of shareholders. The
Regulator can make companies, large shareholders or directors put
money into the pension funds to meet a deficit. It can also stop share
buybacks or even block mergers or acquisitions. But there’s been much
speculation this week that the Regulator could also stop ordinary
dividend payments if the company had a hole in its pension fund. I
asked the Regulator’s Executive Director June Mulroy could it?
MULROY: No. One of the misconceptions that appears to
be running round this week has been that we can intervene in dividend
payments.
LEWIS: So, to take an example, if BA, which has the
biggest deficit (as I understand it) decided to pay its shareholders a
dividend this year, that would not be an event that you would be
interested in?
MULROY: It wouldn’t necessarily be an event we were
interested in. It is certainly something that we would expect the
company to be talking to the trustees about because if the company is
putting the interests of the shareholders ahead of the trustees, then the
trustees themselves ought to be in a position to be able to discuss that
with the company.
LEWIS: So to that extent, you are interested in
dividends, aren’t you? I mean supposing that a major company with a
big deficit decided to pay a dividend to its shareholders. The trustees
said we don’t think you should be doing that. The company disagreed;
trustees came to you. You would then look at that, would you?
MULROY: We would certainly listen to the discussions.
And what we would want to see, we would want to see what the
recovery plan was that the company was seeking to put together, and it
would not be unusual for that recovery plan to include the company
making dividends of one sort or another. We’re not here to try and stop
companies paying dividends at all. In fact we’re actually here to try
and get confidence in pension schemes, but not by putting companies
out of business.
LEWIS: Do you think your powers are too great?
MULROY: If the problem was soluble without these
powers, we wouldn’t be necessary.
LEWIS: And you think you are necessary?
MULROY: Well judging by the results that we’ve had so
far. You know I think what we try to be is very commercial in the way
that we operate. You know we do have long discussions in some
instances to try and balance the interests of the company and the
pension fund and we would only use the powers in extreme-is. To use
the powers would mean that we’d not been able to help the trustees
negotiate a better way forward.
LEWIS: Yes, but that’s a bit like somebody with a big
stick saying, “I’ll only hit you if you don’t give me the money”, isn’t it?
You have the power, so you can enter these discussions knowing that
your will will prevail.
MULROY: I don’t think that is … That is certainly not the
way that we go into the discussions. We go into the discussions very,
very openly with a view to negotiate a reasonable settlement. We’re
looking for a win-win situation. It’s always the best way.
LEWIS: Sure. But ultimately, if there isn’t an agreement
you have your powers.
MULROY: We have the powers, but they are powers that
are there in extreme-is.
LEWIS: June Mulroy of the Pensions Regulator. Well
listening to that in Birmingham is Francois Barker. He’s a pensions
partner at law firm Hammonds and also a member of the Pension
Strategy Group at the Confederation of British Industry. Francois, is
the Pension Regulator using its powers properly?
BARKER: Well, Paul, I think perhaps it’s worth just
recapping for a moment what we’re talking about here. Recent
pensions legislation, as you’ve outlined, gives the Regulator very, very
extensive powers to intervene in corporate activity where it thinks an
under funded final salary scheme or defined benefit scheme is not being
properly protected. And what corporates can do to try and effectively
ensure themselves against this risk is to ask the Regulator to sanction
upfront what they’re proposing to do, and the Regulator will normally
charge a price for giving what’s called clearance and that’s effectively
what happened here.
LEWIS: And the price isn’t money; it’s a deal?
BARKER: Well the price is a deal, which includes money,
normally in the form of a payment to the scheme. And I guess the main
concern of the business community and certainly the CBI would be
around the flexibility that is or is not present around the timescales over
which corporates are being asked to make good those deficits, and the
key thing here is that the powers are exercised in a flexible manner so
that the scheme is protected but not at any risk to the business.
LEWIS: But has that happened? I mean the Regulator
says they’ve done over a hundred deals so far and that they always do
try to protect businesses.
BARKER: Yes and they will say they always act
proportionately and I think the key thing here is just to make sure that
companies are not put under undue time pressure to make these
payments. It’s perhaps important to realise that pension promises were
always set up as long-term vehicles and that ought to be a principle that
goes into the timescales corporates get to make good the deficits.
LEWIS: Yes, but if the Regulator abuses his powers in
the view of the company – for example over the dividends a very large
company might want to pay out – could there be a legal challenge in
court to those powers?
BARKER: Well the Regulator is governed by significant
amounts of pensions legislation and there are opportunities for
representation and negotiation through that, as we’ve heard. Ultimately
though, if the Regulator came up with a decision which was completely
unattractive to a large corporate and if the numbers were big enough,
then I suspect court action couldn’t be ruled out.
LEWIS: How important are final salary schemes? Do
you think these powers may make businesses think it’s just not worth
it?
BARKER: Well there’s no doubt defined benefit schemes
are more costly and perhaps more risky than was previously thought,
and corporates need to know the nature of the beast they’re dealing
with. Nonetheless, defined benefit schemes make sense for an awful lot
of companies still today and those who’ve thought through the
implications of it and are satisfied that the risks and costs are worth it
because of the recruitment and retention advantages will I think stick
with them.
LEWIS: Francois Barker from Hammonds and CBI,
thanks very much for that.
Another major insurer has been fined hundreds of thousands of pounds
for the way it’s handled or mishandled complaints about mortgage
endowments. The £750,000 fine has been imposed on Guardian
Assurance for exposing 5,600 consumers to a high risk of financial loss
after it changed the way it dealt with complaints in January 2003.
Imposing the fine, the Financial Services Authority said that the new
procedures were “neither appropriate, nor effective” and the company
knew the change would reduce the number of successful complaints
about the way it sold mortgage endowments. Guardian is the fourth
insurer to be fined for such failings. I asked Louise Hanson, Head of
Campaigns at Which?, what was different about this case.
HANSON: I am actually quite shocked at the way in which
Guardian has behaved. It would appear that they introduced this policy
to reduce the number of complaints it was upholding. But what’s very
interesting about it is when they introduced it in January 2003, they
actually got internal advice that highlighted that the core principle of
any complaints process was out of step with the rest of the industry and
that there were inherent risks in it. And this really I think just indicates
contempt for its customers. If you’ve been mis-sold, you want to make
a complaint and you want to make sure that complaint’s handled
properly, and yet this process meant that the numbers of complaints that
they were dealing with, the uphold rate, absolutely plummeted. And
when consumers went to the Ombudsman, the Ombudsman was
upholding many consumers complaints and yet they didn’t take any
action themselves to stop it until the FSA actually found out the
problems. So we were really looking for a record breaking fine to show
that you cannot introduce policies such as this that treat your customers
unfairly.
LEWIS: Louise Hanson. In fact the fine wasn’t a record,
partly because Guardian did cooperate with the investigation. I asked
the Director of Enforcement at the FSA Margaret Cole why it wasn’t
higher.
COLE: This particular fine of £750,000 is a very, very
significant penalty and it has to be borne in mind that Guardian agreed
this as part of a bigger package where it also agreed to carry out a
review of over 5,000 previously rejected complaints and has agreed that
that review will be overseen by an independent firm of accountants, has
also agreed and undertaken to ensure that customers who should be
compensated will be properly compensated.
LEWIS: But the evidence from your report, as far as I
could see, is that Guardian had concerns about their revised way of
assessing people who’ve complained. They were warned internally that
this was causing far fewer claims to be accepted, but they did absolutely
nothing about it, and, according to your report, did not bring these
concerns to the FSA. That doesn’t sound like cooperating with the FSA
to me.
COLE: Well looking at this now, I think it’s clear that
Guardian did make some very bad judgements about this and we’re in
no doubt that they should have discussed concerns that they had at the
time about their complaints handling procedure with the FSA. And one
of the key messages that I want to come out of this is to make it
absolutely clear to firms that they should come to the FSA when they
have any concerns about their complaints handling procedure as soon as
those arise and they should discuss those with us.
LEWIS: But they went on for two years without
discussing it with you, and if you hadn’t visited they could still be
doing it the same today.
COLE: Well they’ve mitigated the concerns that we had
by the programme of remediation that they have put in place and
£750,000 is a very, very substantial penalty. But I think our priority in
this case was to bring the matter to an early resolution and to ensure
that we focused on the area of protection to consumers.
LEWIS: And speaking of consumers, what’s your
message to people out there who might be thinking of complaining or
indeed have put in a complaint with other firms perhaps that has been
rejected?
COLE: If they have put in a complaint to a firm that has
been rejected and they’re not happy about that, they can refer the matter
to the Financial Ombudsman Service.
LEWIS: The Ombudsman of course is under great
pressure, isn’t he? He’s just put out his latest forecast, which is that
mortgage endowment complaints are going to go up again next year. Is
there nothing the Financial Services Authority can do in a general way
to stop this happening before it starts?
COLE: Well we can continue to put out the message
about how seriously we treat this kind of inappropriate complaints
handling, and I think we are putting out a very significant and serious
message by this very large penalty of £750,000 and the other parts of
the remedial package that go with it. So we will continue to make it
clear that this is an important area where we will take all necessary
action.
LEWIS: That was Margaret Cole, Director of
Enforcement at the Financial Services Authority. Well Guardian is now
owned by Aegon. We asked for an interview, but the company refused
claiming the FSA discouraged companies from entering into public
discussion in respect of fines. It also said that it “very much regrets
what has happened”. There’s a help line for customers and the
number’s with the BBC Action Line and on our website – but don’t
rush off, it’s not open at weekends.
The tax credit system transferred £15 billion last year from taxpayers to
poorer families, but, as we’ve reported on Money Box before, many of
the payments are wrong. Billions of pounds is overpaid and then has to
be clawed back from hard up families. This week an influential group
of MPs began a parliamentary enquiry into tax credits and what had
gone wrong. They heard first from those who have to deal with the
problems tax credits cause. Our reporter Bob Howard went to the
Treasury sub-committee hearing. Bob, who was testifying this week?
HOWARD: Well we heard from the Citizen’s Advice, Child
Poverty Action Group and One Parent Families. They said the tax
credit system was in theory better than the old fixed payment system.
The problem was that the practice wasn’t working for many claimants
and in some cases it was leaving them worse off. Kate Bell from One
Parent Families was pretty damning of the way HMRC – that’s
shorthand for Revenue and Customs – had set up the system.
BELL: Well it seems that HMRC designed a system
that would work with the IT rather than would work for claimants, and
the problems within the area of overpayments are very much an
example of that. I think they’re getting better – hopefully – but I think
that was a lot of the initial problems. They don’t really understand
what this money meant to people.
HOWARD: Of course the biggest problem has been
overpayments, as Kate Bell mentioned there. In 2004, almost 2 million
claimants received overpayments worth £2 billion. They were then told
they’d have to repay by having their future payments reduced until the
end of the tax year. Now the Chancellor is trying to address these
problems and announce some policy changes in the December pre-
budget report, but Jackie Fielding who works for Selby Citizen’s
Advice Bureau in North Yorkshire was unimpressed.
FIELDING: A lot of it is too little too late. I’m dealing with
people who go to a cash point on a Thursday night to get their money
out to buy their food for the weekend and there isn’t any. And it may
well be six weeks down the line we find out that there’s been an
overpayment.
HOWARD: Jackie very clearly explained the complexities
of the system to the MPs and the way that payments can fluctuate
wildly. One thing which is new to many of the MPs and to others
attending the session was the impact tax credits can have on claimants
who are too sick to work.
FIELDING: Where one member of the family becomes ill
and you can’t actually tell whether it’s going to be a long-term illness,
if you advise that client to inform the tax credits at the moment, they
may well get an increase of tax credits. But what we have worked out
is in most circumstances if they go back to work, they quite often end
up with a massive overpayment. And I have yet to work out a logical
way. All I do is explain to clients that it depends on the time of year
they get ill, it depends on how long they’re going to be ill, and at the
time that they get ill they don’t know how long it’s going to last.
HOWARD: One of the other main points of contention was
Revenue and Customs not explaining to claimants why they’d been
overpaid. Katie Lang from Citizen’s Advice said that was scandalous.
LANG: In one case, the client went in. After going
through the paperwork for an hour and a half with an inland revenue
officer, it turned out that instead of being overpaid £4,000 – quite
substantial – they’d actually been underpaid for 3 months. Now when
errors like that happen with no standard way of informing people and
explaining what’s happening, it is scandalous that overpayments
continue to be recovered.
LEWIS: So Bob, who else is due to give evidence?
HOWARD: Well Paul, this process is due to continue for
several weeks. The most eagerly awaited witness will be Dawn
Primarolo, the Paymaster General. She’s the minister responsible for
running the whole tax credit system. She’s going to have to answer
some pretty searching questions. All this evidence is going to be put in
a report and I spoke to the sub-committee chairman Michael Fallon
after the session and he told me he’s hoping to publish it by early
March in time for the budget.
LEWIS: Thanks, Bob.
If you want to borrow money, now is one of the best times there’s been
in the past 50 years to buy a personal loan. Low interest rates and
strong competition have led to some of the cheapest and most
accessible loans ever. Next week Cahoot will launch an eye catching
headline rate of 5.6%, apparently undercutting its nearest competitors.
And it’s not just the banks. This month British Gas has re-launched a
loan service, sending leaflets to a million customers offering money at
only 6.7%. But are those headline rates as good as they look? Live
now to Brian Brown who’s Associate Director of the research company
Defaqto. Brian, just to clarify. We’re not saying there’s never been a
lower rate in the past. It’s just there are so many more deals available
now.
BROWN: That’s right. Interest rates have come up
slightly in the last year or so, but historically smaller providers had
good deals on offer but today there are so many providers with such
great deals the market is just wide open to the buyer.
LEWIS: Is it really that cheap though? The headline
rates look very good, but are they available to everyone?
BROWN: Well there’s a caveat that says most of these
headline rates are available for higher sums that you’re borrowing, so
it’s quite difficult to find low rate loans for small amounts of money.
And of course if you’re a bad credit risk, a lot of the lenders now use
what’s called differential pricing and they will price based on how risky
they think you are.
LEWIS: So if you see a headline rate of 5½% or 6% and
you apply for a loan, you might not get that rate?
BROWN: That’s right. They are only obliged to give that
headline rate … Only two thirds of customers who are accepted for
loans will actually receive that. You may get higher than that.
LEWIS: And of course on the amount that they specify -
so if that’s on £5,000 and you want £1,000, you pay a lot more.
BROWN: That’s right. If you want £1,000, a lot of those
headline rates are not available for low sums of money.
LEWIS: What’s the best deal for smaller amounts?
BROWN: At the moment … The market is tightening
quite hard on these, but at the moment a company called Money Back
Bank and Northern Rock probably offer the best rates. They’re around
5.7%, 5.8% and that’s down as low as £1,000.
LEWIS: Even on the low ones. That’s good.
BROWN: Even those.
LEWIS: Now of course whatever rate you’re offered,
they always try and flog you insurance as well, won’t they, and that can
boost the cost by a lot?
BROWN: Well it can boost it quite a lot. There’s a good
reason for it; it’s very profitable business for the banks. It’s quite a
significant proportion of your loan if you do accept this payment
protection insurance.
LEWIS: And what do you make of the British Gas offer
offering a loan? It’s not the best, but it’s still not bad, is it?
BROWN: It’s not the best. I mean their leaflets are
advertising 6.7%, but if you check out their website they’re now
offering at 6.2%. But again that’s not available to everyone. If you
want to borrow a lower amount, less than £3,000, they will charge you
14.9%.
LEWIS: And briefly, these are personal loans, a fixed
amount over a fixed time. Are they the best way to borrow?
BROWN: For longer periods of time borrowing, yes they
are. If you want to borrow short amounts of money for short periods of
time actually credit cards are still the best deals.
LEWIS: Brian Brown, thanks very much indeed.
And now news of a strange, new hobby.
ADVERTISEMENT: Would you go to the roof of the tallest building
in your area, take out £100 in crisp £10 notes from your wallet, turn
them into paper darts and see how far you could make them fly? Of
course not. But if you don’t get your tax return in by January 31st,
that’s what you’ll be doing: throwing away 100 hard earned pounds in
the form of a penalty.
LEWIS: Yes, it’s time once more to get your self-
assessment form back, but advertising campaigns like that haven’t
helped the number of people who miss the deadline. That’s growing
year after year, up from 900,000 6 years ago to nearly a million last
year when more than 1 in 10 self-assessed taxpayers faced a £100 fine.
So why do a growing number of people miss the deadline? Live now to
John Whiting, a partner with accountants PricewaterhouseCoopers.
John, lots of people still not making this deadline. What can they do
about it?
WHITING: Well obviously the simple point is just get on
with it and stop playing the ostrich and you know don’t trip over the
usual trip wires of mixing up dividends, interest, all the rest of it. But I
think a lot of it, leaving aside inertia, is “Oh I haven’t quite got the
information for this, that or the other”, or “I don’t understand it”. Well
if you don’t understand, well get help from an adviser, although they
tend to be busy. Look at the notes, ask the Revenue themselves. If you
haven’t got the information for one particular thing, you are allowed to
estimate the figure. Put that in; explain in the white space. That helps
you get your return in. And indeed of course if it comes to the amount
you have to pay, you can estimate that. There’s no penalty for
estimating as such.
LEWIS: So it’s better to get something in or the form in
filled in reasonably and avoid that fine.
WHITING: Absolutely.
LEWIS: And if you really can’t, of course, not
everybody does have to pay the fine, do they?
WHITING: Well yes. I mean the £100 fine is the datum, if
you like, but actually when you look in the detail what you get
penalised is £100 or the amount of tax that you owe at close of play on
January 31st, whichever’s the lower - so of course if you’ve estimated
that actually I owe £1,000 and you decide to send in £1,050 to be on the
safe side and you’ve overpaid, you’ll get your money back, plus a little
bit of interest and you’ve cleared the chance of that £100. Even if you
probably will end up with a penalty notice, you’ll be able to argue it out
in due course.
LEWIS: Well argue it out, yes. I mean the Revenue says
it doesn’t want to fine people, but we heard recently it imposed
penalties on thousands of people who shouldn’t have had them.
WHITING: Well I’m afraid so and I’m afraid there’s always
going to be arguments about, “I got my return in”, “Oh no, you didn’t”,
“Oh yes, you did”. You know it’s the pantomime season. So if you are
sending it in late, there’s a lot to be said for getting a little bit of
evidence. They’re not so good at giving receipts for taking it in on
hand delivery to your local office as they used to be, so perhaps take a
friend or get the camera phone out just to get a bit of evidence.
LEWIS: Evidence that you’ve handed it in. And, John,
there’ll be particular problems this year for husband and wife teams,
won’t there, where one partner does most of the work but the other is
paid substantial dividends? This is the famous Arctic Systems case we
reported on before Christmas, and late on Friday evening the Revenue
said it wanted to appeal that case.
WHITING: Yes. They lost in the Court of Appeal and the
Court of Appeal said that’s it, but the Revenue actually said we want to
the Lords to hear the appeal so they’ve got a few hurdles to get over.
And of course what we’re talking about is husband and wife companies
where we’re probably talking about one of the parties being a
consultant - it’s not running the corner shop - and one person doing all
the earning and trying to split the income. So there’s still uncertainty
there. Best advice there is go by the Court of Appeal judgement, which
says you probably haven’t got a problem, but possibly just make a note
to that effect in your return and, dare I say it, just either put a bit of
money aside or keep your fingers firmly crossed for the future.
LEWIS: Yes because if the Revenue does get appeal and
does win, you will have to pay it back.
WHITING: In potential. And it could be a little while
before it’s finally sorted and that thousands of people know what’s
going on.
LEWIS: John Whiting, thanks. And you can have your
say on self-assessment on our website, bbc.co.uk/moneybox. And if
you have questions about tax, Vincent Duggleby is here Monday
afternoon to answer them on Money Box Live. But still with tax Bob, a
Revenue crackdown on people holding money in offshore accounts.
HOWARD: Yes, Paul. The Revenue’s taking on some of
the country’s wealthiest individuals who hold money in offshore
accounts, pay no UK tax and access the money through a credit card.
This week it’s won a legal case to force a major financial institution –
the name is being kept secret – to reveal the names of all customers
with such accounts. Other banks could now have to follow suit. It’s
expected to mainly affect people with accounts held on the Isle of Man
and the Channel Islands and could raise more than £300 million in tax
going back many years.
LEWIS: Thanks, Bob. Well that’s it for today. There’s
more information about all today’s items on our website,
bbc.co.uk/moneybox, or the BBC Action Line – 0800 044 044.
Personal finance stories on Working Lunch, BBC2 weekday
lunchtimes. I’m back next weekend with Money Box. Today the
producer was Louise Greenwood, the reporter Bob Howard, and I’m
Paul Lewis.
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